Credit unions that grant commercial loans must require sufficient collateral to protect against the risk of loss in the event of a borrower default. According to the guidance, the amount of collateral needed will be determined by the creditworthiness of the borrower and the marketability of the collateral.

Additionally, to confirm, value, manage and control collateral, credit unions must have policies and procedures in place that include:

Standards that should set forth requirements for establishing an enforceable and protected lien position; and

Procedures that should determine if property offered as collateral has been affected by contamination/hazardous material.

Policies should factor in the size and complexity of the loan transaction and should also address:

The level of environmental due diligence required;

Acceptable collateral;

Collateral valuation method for each type of collateral; and

Acceptable LTV for each type of collateral

Additionally, NCUA rules require credit unions to establish internal loan-to-value (LTV) ratio limits, which should be based on internal risk management analysis and accepted financial industry standards. The former prescriptive requirements for LTV ratios have been eliminated to allow credit unions to make their own risk-based decision.

NCUA does not require credit unions to meet the bank regulatory standards for LTV guidelines for real estate but views them as reasonable benchmarks as they reflect common industry practice.

The MBL guidance contains of list of the LTV ratio guidelines for each types of collateral, which can be used as a reference when setting internal limits. When a credit union decides to exceed these limits, it should be able to justify why.

Further, the guidance also states that when calculating LTV for an acquisition transaction, it is sound practice to establish the collateral value to be the lesser of:

Acquisition cost (purchase price) plus improvements; or

Appraised value.

In addition to CompBlog, CUNA’s Compliance Community contains discussion boards and a number of other resources for credit union compliance professionals around the country.

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